Auto dealerships across Chicago are facing unexpected and challenging business conditions due to lack of inventory. The shortage of chips required to build new cars, trucks, and other vehicles has forced many manufacturers to temporarily shut down production. This includes GM which earlier this year temporarily shut down production and Honda which followed suit for most North American production. This has left many car dealer lots practically empty—scarce with late model options and with little information on when new models will arrive. The situation has not only sent the price of existing new cars well above the sticker price but have left many dealerships with no option but to shift attention to used cars and service/parts to drive revenue. Concurrently, dealers are facing a sharp decline in sales as customers simply wait to purchase until prices have normalized and more options become available. Unfortunately, these problems may persist until 2023 when most experts agree that supply chain problems will resolve.
The complications arising from a lack of new car inventory are being experienced by both independent and franchised auto dealers. As more franchised dealers focus on used car sales, it is impacting the inventory levels at independent dealerships. According to the Cox Automotive Dealership Sentiment Index – 3rd Quarter 2021, both limited inventory and current market conditions are some of the top factors holding business back. In addition, customer retention and improving service solutions are a top priority. To help clients, prospects, and others, Selden Fox has provided a summary of the key findings below.
About the Report
Information collected in the report is gathered online between July 26. 2021 and August 9, 2021. The collected data is used to calculate an index where a number over 50 indicates conditions are considered strong or favorable, whereas a lower rating would indicate the opposite. There were 576 responses collected from franchised auto dealers.
Key Report Findings
- Top Business Priorities – The report wanted to uncover the top business priorities for dealers considering the persistent inventory challenges. It found that 48% rated finding/buying new inventory as a top priority, 15% staying in business in general, 8% improving operational efficiency, 6% retaining customers, 6% improving sales and service solutions, 5% gaining market share, 5% retaining employees, and only 3% are focused on expense reduction. The lack of inventory is having a cascading effect on other areas of the business.
- Factors Holding Business Back – There was also interest in identifying the main factors that are holding business back. Not surprisingly 62% indicated limited inventory as a top factor, 37% market conditions, 30% COVID-19 business impacts, 17% operating expenses, 12% credit availability for customers, 10% staff turnover, 6% consumer transparency in pricing, and 4% lack of OEM incentives.
- Current Market Conditions – Despite the obvious challenges it appears that current market conditions continue to remain favorable. It was found that current conditions received a favorable rating of 73 and expected conditions in the next three months received also received a favorable rating of 71. At the same time, dealership profits have also been strong with a very favorable rating of 86 while operating costs appear to be growing with a rating of 68.
- New Car Sales Environment – As inventory issues persist the new car sales environment continues to deteriorate. It was found that the sales environment is fair with a rating of 51 (down from a 62 rating in the prior quarter). It appears the limited OEM new vehicles incentives may be contributing to the problem. Respondents rated incentives as very poor with a rating of 26. Although given the lack of inventory it is unlikely new incentives will soon be introduced.
- Staffing Levels – The reduction in sales means dealers will not need to maintain the sales force at the current level. This was confirmed in the report as it was found current staffing level are declining (a rating of 48). As more emphasis is placed on expense management it is unlikely there will be significant increases soon.
Due to inventory shortages, auto dealers in Chicago and across Illinois will be challenged to find new ways to drive profitability through used car sales and fixed operations. This will require innovative thinking about how to serve existing customers and attract new ones. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.